First Sale Doctrine: History and Push Towards Digital Products and Resources

Executive Summary

Have you ever borrowed a book from the library or from a friend? Have you rented a laptop that has been used by other library patrons? Have you ever bought vintage clothes or jewelry, or used tools from a cheap garage sale? Have you also sold personal belongings to friends, neighbors, or the eBay community for half the price you bought them at? If so, you have expressed your right of first sale. The first sale doctrine is codified in Section 109(a) under Title 17 of the U.S. Copyright law. It has been responsible for protecting sellers from claims of copyright infringement whenever they chose to dispose, resell or redistribute a purchased good. However, the doctrine has its failures, elucidated by being the subject of a long history of heated debates and lawsuits. Material goods have expanded to many other forms. To name the most prominent forms, they are digital, foreign, and/or cross border (gray market goods). First sale doctrine has often been a concept set against intellectual property law in many court cases. This paper explores many of these cases old and new, and will then use the ambiguities and loopholes in the doctrine to push for copyright reform, which is largely about accommodating digital content. In conclusion, a strong framework has been formed through a century of debates and unsettling decisions of court cases for the first sale doctrine to expand towards digital content without imposing on IPR.

Setting the Tone

Slated to go into effect January of 2017, a new California law has been enacted and sanctioned by Governor Jerry Brown to regulate memorabilia sales and guard against “forgery mills” (Barry, 2016). Specifically, it will require any autographed material costing more than five dollars to be accompanied by a certificate of authenticity (COA). This would not only impose major inconveniences to distribution rights of especially third-party sellers, whose names must be provided on the same COA of an inherited product down the chain, but it also illuminates the possibility of a first sale doctrine violation, an attempt to eliminate it, or even an attempt to complicate it for a larger purpose. Herein lies the framework for discussion on Section 109 of Chapter 1 under Title 17 of the U.S. Copyright law, its purpose, its conflicts with intellectual property rights (IPR), and the case for expanding its authority towards digital products and resources.

What is the First Sale Doctrine?

It is the reason for why I was able to sell my three-year-old guitar, dusty paintings, and an old ipod for personal income. It is why perhaps someone else can have all my clothes for free, if I had them donated. But the first sale doctrine is embodies a more legal environment.

The Bobbs-Merrill Co. v. Straus case of 1908 is said to have been the establishing point of the first sale doctrine. The Supreme Court had ruled that a publisher could not impose price limitations on books for future, or third-party, retail sellers, once the books have been purchased from the publisher. The Court held that the publisher had relinquished all rights to control the future sale of it (Reis, 2005).

The first sale doctrine was codified and recodified in 1909 and 1947, respectively, until the Copyright Act of 1976, which set the doctrine in section 109 under Title 17 of the United States Code, was signed and is still enforced today. Section 109(a), which places a strong limitation on the distribution right granted by Section 106(3), states:

Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord (17 U.S.C. §109).

First sale doctrine, therefore, protects retail sellers or owners of a copyrighted work from accusations of copyright infringement by taking away the ability of copyright holders to control the distribution or life of their works once they are sold to customers. This is also known as the “Exhaustion rule.” The Supreme Court stated that “[t]he whole point of the first sale doctrine is that once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution” (Reis, 2005, p. 179). However, it is important to note that the exhaustion rule does not limit the rights of copyright holders to reproduce lawful copies of original work. That means the rule does not apply if a subsequent owner were to unlawfully reproduce copies of the original work and sell those copies at a lower price. Furthermore, it has been noted that “the first sale doctrine would not provide a defense to . . . any nonowner such as a bailee . . . [or] a licensee,”  as the Supreme Court reiterated in the Bobbs-Merrill case that a distinction between owners and licensees exists to determine whether the first sale doctrine applies (Reis, 2005, p.179).

A History of Lawsuits

The application of first sale has been legally tried on many fronts throughout the century, due to much ambiguity of its extent. According to Ferretti (2013), “Interpretation of the first sale doctrine is important because it affects secondary markets, lending libraries, and the U.S. economy” (p.262). Libraries are great examples of the expression of right to first sale, as they have “loaned, sold, rented, or gifted a U.S. copyrighted good (i.e., a book)” (Ferretti, 2013, p. 263). But what happens if the right of first sale has geographical limitations?

In 2008, John Wiley and Sons, Inc. filed a lawsuit against Supap Kirtsaeng after having English language textbooks purchased in Thailand and shipped to him in the United States for his studies. After he sold the textbooks and kept the profit, Wiley’s suit claimed that “their rights under 17 U.S.C. § 106(3), the exclusive right to distribute, and 17 U.S.C. § 602, prohibition of importation, were violated” (Ferretti, 2013, p. 271). After the District Court and the Second Circuits Court ruled in favor of Wiley based on a geographical interpretation of the first sale doctrine, Kirtsaeng v. Wiley eventually reached the Supreme Court in 2011. The Court offered a non-geographical interpretation of the doctrine and “ruled in favor of Kirtsaeng, which potentially protected future court cases against libraries and second market retailers” (Ferretti, 2013, p.273). What this meant for libraries and Americans is the “right to receive information and legitimately resell a lawfully acquired work as a fundamental right” since many of our holdings are foreign works (p. 274). “However, as our society continues to view copyright as commodity, those rights without fees will continue to be questioned” (Ferretti, 2013, p 274).

As in the most recent, but similar, case involving Trader Joes, a lawsuit was filed against Canadian man, Michael Hallatt, for hiring American agents to purchase Trader Joes goods for him to resell at inflated prices in a Canadian “substandard store,” (Mapes, 2016). The concern about this cross-border gray market stunt was that it could tarnish the brand or trademark of the grocery chain. Although the first sale doctrine holds some front in the case, it now seems to “depend on the evidence that can be gathered to show consumers were confused by the products and believed that Pirate Joe’s products were authorized by Trader Joe’s to sell its goods. If they can reach that nexus, they can prove they’ve been damaged to some extent……” (Mapes, 2016). The case also sheds light on the potential clashes between the first sale doctrine and other U.S. codes of copyright law, such as the Lanham Act of 1946, where protection against trademark infringement is enforced.

Another gray area that challenged the extent of the first sale doctrine came to light in 2004 when the Court of Justice of the European Union involved a case of reselling backup copies of software. According to Moody (2016), backup copies were never owned by the initial acquirer or seller of the product; therefore, the first sale’s exhaustion rule does not apply, in that it does not, in any way, negate or limit a copyright owner’s reproduction rights. As aforementioned, a third party seller does not have the right to make copies of a copyrighted work in order to profit off of them. However, in an era where transferable ownership is enabled widely in the digital age, challenges against the first sale doctrine is continuous and inevitable, from those who depend on IP protection, as well as from those who value freedom to receive and pass on information goods.

Mitigating Conflicts with IP: Post-Sale Restraints

Without debunking the doctrine's validity and continued power, Katz (2014) proposed insights that can help fill some gaps and missing theoretical foundations. Ferretti (2013) reminds us, “One of the reasons the Copyright Act exists is to motivate people to create. There are incentives in place to encourage creative labor. There is no doubt that the monetary incentive is one of the most enticing” (p.269). In addressing today’s society where copyright is commodity and causes producers and laborers to see the first sale doctrine as an aversion to their incentives, Katz (2014) posited that “..post-sale restraints that are enforceable with unexhausted IP rights can facilitate cartels and other types of anticompetitive behavior better than contractual restraints” (p. 70). Two possibilities that can achieve a socially-optimal restraint of distribution rights, as well as ownership rights are:

a) the doctrine should not be relied on to automatically invalidate short-term contractual post-sale restraints, and (b) that the law might actually uphold such contracts when they are entered into between collaborating and non-integrated firms when they are necessary to encourage investment and control opportunism (Katz, 2014, p.59).

She proposed that post-sale restraints, also known as vertical restraints, involve vertically-situated parties that do not share common interest in reduced competition, but can use anti-competitive measures to their advantage. Post-sale restraints can “restrict what a buyer can do with the goods she purchased—where she can resell them, to whom, at what prices, and whether she will have to provide pre- or post-sale services, repairs, warranties, etc.” and  “if IP rights can be relied on to enforce the restraints, the additional set of remedies could make those restraints more effective” (p. 73). It is understandable that externalities and market imperfections may cause IP owners to seek post-sale restraints or a weakened version of first sale doctrine for “economically justified reasons,” but if the first sale doctrine can permit “IP owners to implement and enforce some post-sale restraints when they are most likely to be beneficial,” we can progress on closing the gap between producer and consumer rights at least a bit (Katz, 2014, p. 60). In some cases, opting out of the first sale may be the most socially optimal way.

More Conflicts with IP: Information and Technology

Things always seem bleak for IP owners when parallel market trades (gray market) are protected by the copyright law itself. It would be unfair if goods--sold abroad at a lower price and charged locally--are “imported (or reimported) by an unauthorized dealer, and then sold domestically in competition with the same goods sold through the local authorized distribution system designated by the manufacturer” (Katz, 2014, p. 74-75). And things certainly are bleaker on the supplier and production side, as society is now immersed in digital technologies and media. IP law exists in “part to protect existing copyright assets from the competition that would be posed by very cheap reproduction of information in digital form over electronic networks” (David & Foray, 2002, p.18). Currencies are becoming digital. Bitcoin, as an example, uses the system of blockchain technology to maintain a growing list of ordered records of some or all of the recent transactions, called blocks. Blockchain technology is increasingly becoming a supplement or replacement of ownership recordation systems (Lee et. al., 2016). Because current IP licensing law focuses on contractual relationships and is predicated on ownership, this kind of digital technology is set to complicate the legal system in myriad ways. Blockchain technology can change the IP law application, as well as the first sale doctrine, to digital products. It is normally very hard to tell if the original purchaser has resold the original digital product file or a second copy. “Blockchain technology allows digital copies to be individually identified such that sellers could verifiably and fully transfer copies, allowing application of the doctrine” (Lee et. al., 2016).

Pushing Boundaries of First Sale Doctrine in the Digital Age: Licensing Debates

No doubt the first sale doctrine has reached a very ripe age for change. Even though libraries depend on it to fully operate their services to loan, sell, rent, or gift physical items, “library users now expect libraries to have access to digital resources regardless of the cost or the terms of the licensing agreements between the library and the content providers” (Koehn, 2010, p. 166). When it comes to computer software or a database, libraries need to acquire licenses to use them. Since licenses are not ownership, the first-sale doctrine does not apply here, because there is no physical property to lend (Koehn, 2010). This enduring digital loophole in the first sale doctrine is why there is confusion over what patrons are allowed to do with content of an electronic resource, which doesn’t belong to the library (Koehn, 2010, p. 164).  Another concern within this quandary is that libraries and institutions “are now paying subscription or licensing fees to access online content that continues to be owned by a third party” (Koehn, 2010, p. 164). Sometimes, this forces libraries and institutions into a constant need to determine the best value and usefulness of materials associated with subscription deals, whose costs may include collections-weakening, unwanted journals.

In 2008, the Vernor v. Autodesk case involved an eBay seller who legally purchased authentic, used copies of Autodesk’s AutoCAD software and then resold them on eBay (Pike, 2010). Autodesk alleged copyright infringement on a DMCA takedown notice, causing eBay to temporarily suspended the auction. After the seller asserted “first sale” rights and resumed auction several times,  the 9th Circuit found that Autodesk never sold the software to the original owner, rather they licensed it. Consequently, ownership was never passed down to any subsequent purchasers of the software; therefore, the first sale doctrine did not apply, and the Court decided that Autodesk’s right to control distribution was infringed upon. Libraries, public interests groups and industries did not take kindly to the latter decision, which seemed to make the statement that sellers could place licensing restrictions on any of kind of copyrighted material.

The first sale doctrine can and should be modified and enhanced, as there has been already many strong arguments that provide that framework. Pike (2010) emphasized two benefits that would help push it forward in Congress:

...that distribution of those works through “libraries, used markets, online auctions, and  hand-to-hand exchanges was particularly important for works that have a comparatively short in-print commercial life…….. flexible licensing options that can help increase availability and decrease costs on content…..point to markets for on-demand and electronic “rental” of movies and television shows, and discounted licenses of software for nonprofit and educational consumers (Pike, 2010, p.17).

For now, the first sale doctrine, just like IP law, is predicated on ownership of work, so that copyright holders maintain control of the reselling of copies. But as the transfer of content and commercial software become more digital, it has been a massive legal struggle to “consistently make the distinction between license and sale. Software transfers especially have strong licensing restrictions, but federal case law has not clearly determined whether these types of transfers are licenses or true sales” (STLR, 2008).

Expanding First Sale Doctrine to Digital Content

To understand how to legislate digital content redistribution within the right of first sale, it is important to acknowledge that in the information economy, “..knowledge is not like any other kind of property. Intellectual property cannot be placed on an equal footing to physical property for the simple reason that knowledge and information possess a specific characteristic that economists refer to as “non-rivalry in use” (David & Foray, 2002, p. 19). Current issues show us where the first sale doctrine is inert. According to Heuval (2012), selling a copy of a copyrighted work “does not require relinquishment of perfect copy (p. 662). This means that music, films, software, and video games can be ripped from a CD to an owner’s hard drive, be made available for digital transfer or sale, and the owner will still have the original, “perfected” copy in his possession. First sale also does not “shelter resale or rental or purely digital copies” (Heuval, 2012, p. 668). A "used" digital file would never appear as used, rendering it just as valuable as the original and just as easy to distribute (Brustein, 2015). Film studios cannot prohibit Redbox and Netflix from profiting from renting out DVDs, which have been purchased at retail. These are all valid concerns and a diminution of IPRs for original creators, producers, and/or owners. However, as David & Foray (2002) maintained, blocking access to knowledge and production can create enormous waste. When information or knowledge are not passed around, they “cannot be enriched, commented upon, and recombined by others” (David & Foray, 2002, p. 19), all because they are protected by rights all around. If closely protected for too long, the products become expensive, and the knowledge base will be shrinking in value. This is why the power of the exhaustion rule is important, so that copyright does not hinder the dynamics of knowledge.

While Heuval (2012) had suggested that online file-sharing be legalized without the need for a digital first sale doctrine, Brustein (2015) posited that according to John Ossenmacher, CEO of ReDigi, “the law doesn't change just because a company uses a different form of media. He thinks any reform should simply reaffirm that digital media shouldn’t be held to different standards.” In 2011, ReDigi actually tested out the unwritten extent of the law with a service enabling people to resell songs bought through iTunes. “Once a song is transferred, usually at a lower price, the original owner permanently loses access. The proceeds are split between the company that holds the copyright, the person who sold the downloaded song, and ReDigi” (Brustein, 2015). GameStop has also promoted the idea that publishers and companies can reap profits off of file-sharing. “If people can resell their old media, they will spend the proceeds on new stuff, and everyone ends up better off” (Brustein, 2015).

Future Prospects for the U.S. First Sale Doctrine and Enterprises/Organizations that Depend on it

By this logic, Brustein (2015) asserts that our iTunes library are can be thought of as a “hoard of cash waiting to flow into the coffers of record companies.”  ReDigi and GameStop may have set the framework for a future where the rights of first sale and IPR can function together more amiably. Film Industries can reform partnerships with Netflix, Redbox, and ReDigi; record companies may form stronger partnerships with iTunes, or even Pirate Bay. Book sellers may even profit from “used e-books”

As Pike (2010) previously suggested, flexible licensing options help not only in increasing availability and decreasing costs on content, but also in decreasing restrictions on consumer rights to distribute, especially in markets for on-demand and electronic “rental” of movies and television shows. Libraries, which are now expected to provide electronic services, can appreciated discounted licenses of software for nonprofit and educational consumers. Cases such as UMG v. Augusto, Vernor v. Autodesk, and… should inspire adoption of rule to allow transfer of ownership of software, CDs, and other born-digital material (Wang, 2010).

Word is currently out that Amazon is building an used e-book marketplace (Kozlowski, 2016). A new section of the Kindle bookstore will have a used e-book category. It is designed to work similarly to looking to buy a print book; you can buy one used or new. “When a user lists an e-book they purchased from Amazon and someone else buys it, the original e-book disappears from the user’s account and can no longer be accessible on their Kindle or via the Cloud” (Kozlowski, 2016). Amazon’s attempt to reconcile the first sale doctrine’s distribution right with the nature of digital media, such as eBooks, is on par with various digital initiatives to reform copyright law.

The ability of copyright reform to combat piracy may be a stretch from these digitally progressive efforts; however, it is theoretically possible given that law can define crime. Piracy would not exist, at least not prominently, if copyright law loosened its grip on ownership, licensing, and limitations on distributing secondary copies. In fact, the logic is that if the world can depend on digital and social networks to cheaply or freely reproduce copies, then there would be no need for publishers or record companies to produce more original copies (unless by demand). This way, consumer surplus can be reduced in a world prone to market failures (Peitz and Waelbroeck, 2006).

References

Barry, R. R. (2016). New California Law Will Make Signed Books & Art Harder to Sell. Fine Books and Collections Magazine. Retrieved from https://www.finebooksmagazine.com/fine_books_blog/2016/09/new-california-law-will-make-signed-books-art-harder-to-sell.phtml

Brustein, J. (2015). Secondhand Downloads: Will Used E-Books and Digital Games be for Sale? Bloomberg. Retrieved from http://www.bloomberg.com/news/articles/2015-02-10/secondhand-downloads-will-used-e-books-and-digital-games-be-for-sale-

David, P.A. and Foray, D. (2002). An introduction to the economy of the knowledge society. International Social Science Journal, 54(171), March, 9-23.

Ferretti, J. A. (2013). First Sale Decided: The Road to the Kirtsaeng v. Wiley Decision and What It Means for Libraries. Serials Librarian, 65(3-4), 261-276. Retrieved from EBSCOHost database.

Heuval, S. V. (2012). Fighting the First Sale Doctrine: Strategies for a Struggling Film Industry. Michigan Telecommunications & Technology Law Review, 18(2), 661-689. Retrieved from EBSCOHost database.

Katz, A. (2014). The First Sale Doctrine and the Economics of Post-Sale Restraints. Brigham Young University Law Review, 2014(1), 55-142. Retrieved from EBSCOHost database.

Koehn, S. L. (2010). The Acquisition and Management of Electronic Resources: Can Use Justify Cost? Library Quarterly, 80(2), 161-174. Retrieved from EBSCOHost database.

Kozlowski, M. (2016). Amazon Secretly Developing a Used e-Book Marketplace. GoodEReader. Retrieved from http://goodereader.com/blog/e-book-news/amazon-is-secretly-developing-a-used-e-book-marketplace

Lee, J., Steiner, J., McKenzie, D. (2016). Legal implications of expanded use of blockchain technology. Financier Worldwide. Retrieved from http://www.financierworldwide.com/legal-implications-of-expanded-use-of-blockchain-technology/#.WBLkBeErInV

Mapes, T. (2016). Appeals Court ruling keeps Trader Joe’s lawsuit against Pirate Joe’s alive. NorthernCaliforniaRecord. Retrieved from http://norcalrecord.com/stories/511015211-appeals-court-ruling-keeps-trader-joe-s-lawsuit-against-pirate-joe-s-alive

Moody, G. (2016). Backup copies of software can’t be resold, rule top EU court. Ars Technica UK. Retrieved from http://arstechnica.co.uk/tech-policy/2016/10/software-backup-copies-cannot-be-re-sold-rules-cjeu/

Peitz, M. and Waelbroeck, P. (2006). Piracy of digital products: A critical review of the theoretical literature. Information Economics and Policy, 18, 449-476.

Pike, G. H. (2010). Legal Issues: Is First Sale for Digital Content at Risk? Information Today, 27(10), 17-19. Retrieved from EBSCOHost database.

Reis, S. (2015). History of First Sale Doctrine. TOWARD A “DIGITAL TRANSFER DOCTRINE”? THE FIRST SALE DOCTRINE IN THE DIGITAL ERA (178-179). USA: Northwestern University Law Review

STLR. (2008). Amazon Kindle and Sony Reader Locked Up: Why Your Books Are No Longer Yours. The Columbia Science and Technology Law Review. Retrieved from http://stlr.org/2008/03/21/amazon-kindle-and-sony-reader-locked-up-why-your-books-are-no-longer-yours/

There are currently 52 official Titles in the U.S. Code. Title 17 outlines the United States copyright law, as part of the U.S. Code. It was codified into positive law on July 30, 1947. The First Sale Doctrine was codified in the Copyright Act of 1976. It is found under Section 109 of Chapter 1 (Subject Matter and Scope of Copyright) of Title 17.